January 23, 2012 | In: Financial

Beware Bank of America

Unless you are still in holiday mood, you would have probably noticed that Bank of America’s stock has skyrocketed since the beginning of the year. BAC is up about 31% this year so far and the month of January is not even over yet. So, what’s the deal? And should investors jump in to buy shares in this bank?

Well, let’s first remember that it’s January, and we all know of the January Effect in the Stock Market. BAC is a stock that is known to have a very healthy January, simply because it consistently have had bad years. 2011 was no different for BAC. In fact BAC’s stock lost about 60% of its value in 2011, where it started trading at $15.25 and ended the year at almost $5 (briefly touching $4.92 back in December). What is happening right now is that all these small investors who sold their positions in BAC back in December of 2011 for tax reasons (to claim their loss on the stock as capital loss) are now re-buying their positions, simply because they are very hopeful (or simply because they are greedy and they don’t accept that losing is part of the stock trading game).

The point here is that nothing has changed in the fundamentals of Bank of America for the stock to go up dramatically (the management is still the same – and will most likely not change in 2012). But, when will the bullish trend stop? Well, as soon as we hear some bad news about Bank of America or Europe, which shouldn’t take a long time to happen. The situation in Europe is worsening everyday and officials there are using duct tape for quick fixes – which is not a long term solution.

We all know that 2012 is a very bad year for banks, but it seems that we never learn, and nor do we care to learn…

Beware Bank of America, as you will lose more money on this stock than you can ever imagine, especially if you were suckered into buying this stock near the end of the January Effect. Wait until the beginning of March to get into BAC if you really want to, but even then you will still lose money, as the stock will continue its decline throughout the year (but your losses will be much lower than if you buy the stock today, for example).

In my opinion, BAC will try to test the $10 by mid-February, only to become a penny stock sometime this year. A BAC reverse split is imminent this year, for it is not in the interest of management to see the stock price drop lower than $5 for a long time. We all know though that reverse splits carry a curse: any stock that is reverse splitted once will be reverse splitted forever (or the company will just go bankrupt).

By the way, some investors claim that BAC will no longer exist by the end of the year. And I’m talking about investors who predicted the fall of very large financial institutions, long before anyone imagined that these institutions would actually fall.

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

Comment Form